The Bank of England is expected to hold rates steady but will send hawkish signals: August inflation was 3.1%, higher than expected, and the market is betting on a rate hike in November.

The situation in the Middle East has driven up energy prices, increasing inflationary pressures in the UK and putting pressure on the Bank of England to tighten monetary policy again.

According to Bloomberg, the market widely expects the Bank of England's Monetary Policy Committee (MPC) to keep the benchmark interest rate unchanged at 3.75% on Thursday, but may release hawkish signals, leaving room for a rate hike in November. At the same time, the central bank will announce its new annual quantitative tightening plan.

The UK's CPI rose to 3.1% in August, higher than the Bank of England's July forecast of 2.8%. Middle East conflicts have pushed up oil and gas prices, and economists expect inflation to approach 4% early next year. Meanwhile, the European Central Bank and the Federal Reserve have both maintained or strengthened their tightening stances recently, increasing policy pressure on the Bank of England.

The market is currently pricing in a roughly 12% probability of an immediate rate hike on Thursday; the expectation that the UK interest rate will rise to 4.75% by July next year has also been priced in.

Voting pattern: 6 to 3 unchanged, hawkish camp may expand.

According to a Bloomberg survey, economists generally expect the MPC to vote 6-3 to keep interest rates unchanged, consistent with the July meeting result. Chief Economist Huw Pill, external committee members Megan Greene and Catherine Mann are expected to continue advocating for rate hikes, all three expressing concern that inflation could further reinforce itself through wage increases.

Deputy Governor Clare Lombardelli is considered a more hawkish member of the committee, but she still voted to keep interest rates unchanged in July. A Bloomberg survey shows that three economists expect the number of committee members supporting an immediate rate hike to rise to four this time.

In an interview with the BBC, former Bank of England policy committee member DeAnne Julius said that the possibility of a 25 basis point rate hike was "quite reasonable," mainly considering the situation in the Middle East and the fact that the CPI had risen above 3%.

Inflation Outlook: Energy bills could rise by 25%, but economic growth remains resilient.

Rising energy prices are becoming a major risk to UK inflation. According to Bloomberg Economics, if energy prices remain high, UK residents' energy bills could rise by 25% in January next year after the price cap is reset, potentially pushing inflation to double the 2% target. Food and airfare prices also continue to exert downward pressure.

Deutsche Bank's chief UK economist, Sanjay Raja, predicts UK inflation will be close to 4% in December, noting that a key issue is whether current interest rate constraints are sufficient. Pantheon Macroeconomics' chief UK economist, Robert Wood, believes that soaring energy prices and market pricing increase the risk of a hawkish tone in the central bank's statement. Bank of England Governor Andrew Bailey also stated last week that with the ongoing conflict in the Middle East, the risks to UK inflation are skewed to the upside.

Meanwhile, economic growth has outperformed the central bank's previous forecasts. The Bank of England projected second-quarter GDP growth of 0.3% in July, with official figures subsequently revised to 0.4%. July's economic growth also increased by 0.4% month-on-month, exceeding the central bank's previous forecast of 0.1% for the third quarter. This economic resilience has also reduced the central bank's concerns about a significant economic downturn while maintaining its tightening stance.

Quantitative tightening: Annual balance sheet reduction may be reduced to £50 billion

The Bank of England launched quantitative tightening in February 2022, reducing its holdings of government bonds through active sales and bond maturities. Currently, its holdings of government bonds have decreased from approximately £895 billion to £489 billion.

The previous year's reduction target was £70 billion, and the market generally expects it to slow further to £50 billion this time, with active sales accounting for about £20 billion.

Recent research by the Bank of England indicates that quantitative tightening has pushed up the yield on 10-year UK government bonds by approximately 20 to 30 basis points. Reports suggest the Bank of England may consider halting its active sales of long-term government bonds to avoid disrupting government bond issuance plans.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.